EXAMPLE 9.4 Moving Averages Consider the price data in the following table. Each observation represents the closing level of the Dow Jones Industrial Average (DJIA) on the last trading day of the week. The five-week moving average for each week is the average of the DJIA over the previous five weeks. For example, the first entry, for week 5, is the average of the index value between weeks 1 and 5: 12,290, 12,380, 12,399, 12,379, and 12,450. The next entry is the average of the index values between weeks 2 and 6, and so on. Figure 9.4 plots the level of the index and the five-week moving average. Notice that while the index itself moves up and down rather abruptly, the moving average is a relatively smooth series, since the impact of each week's price movement is averaged with that of the previous weeks. Week 16 is a bearish point according to the moving average rule. The price series crosses from above the moving average to below it, signifying the beginning of a downward trend in stock prices. 5-Week Moving Average 5-Week Moving Average Week DJIA Week DJIA 11 12 1 2 3 4 13 14 12,290 12,380 12,399 12,379 12,450 12,513 12,500 12,565 5 15 16 12,590 12,652 12,625 12,657 12,699 12,647 12,610 12,595 12,499 12,466 12,555 12,586 12,598 12,624 12,645 12,656 12,648 12,642 12,610 12,563 6 12,380 12,424 12,448 12,481 12,510 12,540 7 17 8 18 9 12,524 19 10 12,597 20 EXAMPLE 9.4 Moving Averages Consider the price data in the following table. Each observation represents the closing level of the Dow Jones Industrial Average (DJIA) on the last trading day of the week. The five-week moving average for each week is the average of the DJIA over the previous five weeks. For example, the first entry, for week 5, is the average of the index value between weeks 1 and 5: 12,290, 12,380, 12,399, 12,379, and 12,450. The next entry is the average of the index values between weeks 2 and 6, and so on. Figure 9.4 plots the level of the index and the five-week moving average. Notice that while the index itself moves up and down rather abruptly, the moving average is a relatively smooth series, since the impact of each week's price movement is averaged with that of the previous weeks. Week 16 is a bearish point according to the moving average rule. The price series crosses from above the moving average to below it, signifying the beginning of a downward trend in stock prices. 5-Week Moving Average 5-Week Moving Average Week DJIA Week DJIA 11 12 1 2 3 4 13 14 12,290 12,380 12,399 12,379 12,450 12,513 12,500 12,565 5 15 16 12,590 12,652 12,625 12,657 12,699 12,647 12,610 12,595 12,499 12,466 12,555 12,586 12,598 12,624 12,645 12,656 12,648 12,642 12,610 12,563 6 12,380 12,424 12,448 12,481 12,510 12,540 7 17 8 18 9 12,524 19 10 12,597 20